Advertisers Drop Commissions, Still Use 'Creative' Shops For Media Service

Advertisers spent about $250 billion on U.S. media outlets in 2003. Based on the traditional 15 percent commission system, that would have meant roughly $37.5 billion in net media commissions would have been paid out to ad agencies. That was the old days. Today, less than 10 percent of advertisers say they are using a traditional media billings-based commission system to compensate their agencies, according to the 2003 edition of a periodic survey from the Association of National Advertisers. The study, the 2004 ANA Agency Compensation Survey, which was released Wednesday at the ANA's Financial Management Conference in Scottsdale, AZ, offers a rare public glimpse into the rapidly shifting financial relationships between advertisers and their agencies, found that only 10 percent of agency services are now compensated via traditional media billings-based commissions.

Interestingly, media services, which were the original basis for the commission system in the first place, represent even less of that base. Only 8 percent of media planning and buying services are now compensated via direct commissions. The vast majority of agency compensation is now based on some form of negotiated fee, either fixed/hourly fees, or a blended compensation model that mixes fees and commissions.

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The study also revealed that despite perceptions of rampant unbundling and consolidation of media services at dedicated media agencies, a substantial share of media services continue to be handled by so-called "creative" agencies, especially planning and especially among smaller or medium-sized advertising accounts.

Who Handles Planning/Buying?


<$15 million $15-100 million $100+ million
Buy Plan Buy Plan Buy Plan
Creative Agency 85% 88% 40% 50% 29% 44%
Media Agency 15% 12% 60% 50% 71% 56%

Source: Association of National Advertisers 2004 Agency Compensation Report. Base = 112 advertiser respondents reflecting 575 agency compensation agreements.

But the most striking revelation to come out of the study is the fact that more than half (53 percent) of advertisers now conduct an annual audit of their agency media services, while 24 percent conduct one every other year. Five percent of marketers conduct media audits every three years, 5 percent conduct them every four years, and 12 percent of the respondents did not know.

While the 2004 study did not trend media auditing, which is deemed a relatively new practice, the practice of agency financial audits appears to have actually declined from previous studies. Only about half (51 percent) of marketers said they conducted financial audits of their agencies in 2003, down from 76 percent in 1994, the peak year for such audits, according to the ANA trend data.

Not surprisingly, the study also identified a disconnect between agencies and their clients over what constitutes "acceptable" agency profits. What is surprising, is that advertisers said their agencies, on average, are not achieving what the marketers consider to be "acceptable" profit margins. On average, clients said their agencies' reported profit margins were 12 percent in 2003, but those very same clients said they considered "14 percent" to be an acceptable margin. Their agencies, conversely, said "18 percent" was acceptable.

Nearly two thirds (62 percent) of clients said their agencies' "reported" profit margins were between 7.6 percent and 17.5 percent during 2003,while 67 percent said they believed a range of "10 percent to 20 percent" constituted "fair profit."

Compensation Methods


--Commission-- ----Fees---- Fees/Commission
Creative 6% 77% 6%
Media Planning 8% 76% 9%
Media Buying 8% 71% 11%
Multicultural 2% 83% 6%
Direct Response 3% 70% 10%
CRM 3% 78% 11%
Interactive 7% 65% 11%
Promotion 2% 72% 11%
Event Marketing 0% 79% 9%
Public Relations 0% 86% 8%

Source: Association of National Advertisers 2004 Agency Compensation Report. Base = 112 advertiser respondents reflecting 575 agency compensation agreements.
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